State pension 'not keeping pace'

Britain's basic state pension is to rise by less than £3 a week - offering little to help to households facing steep rises in energy bills - as the Treasury pockets £1.5 billion in savings from a benefits squeeze.

Britain's basic state pension is to rise by less than £3 a week - offering little to help to households facing steep rises in energy bills - as the Treasury pockets £1.5 billion in savings from a benefits squeeze.

The anticipated pensions rise from £110.15 to £113.10 is linked to September's official CPI inflation figure of 2.7%, which was published by the Office for National Statistics.

But it comes just a week after electricity and gas supplier SSE became the first of the Big Six energy companies to hike tariffs this year, announcing an 8.2% rise which is three times the Consumer Prices Index rate.

Campaigners say the Government should restore a link between pensions and a different inflation measure, the Retail Prices Index (RPI) - which they say would have resulted in a £3.50 rise.

Dot Gibson, general secretary of the National Pensioners' Convention, said the decision to abandon the link after the 2010 election had robbed older people of a proper increase in their pensions.

She said: "Many older people are struggling with the rising costs of living and our pensions are simply not keeping pace."

RPI, currently at 3.2%, is still used to calculate rail fare rises and the amount the Treasury collects in business rates - though the CBI is calling on the Government to put a lid on any increase in these charges.

According to the British Retail Consortium, the rise if implemented would cost retailers £242 million a year, risking shop closures and jeopardising nearly 20,000 jobs.

Meanwhile, the Government said today's inflation figures meant that a 1% cap on some welfare rises, announced last year, would represent a £1.5 billion saving for 2014/15.

The payments - which include child benefits and job seekers' allowance - would have been higher if instead of being capped they had still been linked to CPI.

The squeeze, which first took effect in April, is already on course to save £515 million for 2013/14.

In the wider economic picture, the 2.7% CPI rate will disappoint policymakers amid City expectations that inflation would slip back to 2.6%.

Instead it remained unchanged as falling fuel costs were offset by a downward contribution from air fares including a rise in domestic flight prices.

CPI has remained stubbornly above the Bank of England's 2% target since December 2009, meaning families have been squeezed as wages fail to keep pace.

The Bank of England has been forced to tolerate high inflation for the sake of the recovery but if hopes of falling CPI fail to materialise, it could jeopardise governor Mark Carney's guidance on interest rates.

Policymakers have pledged to keep them at rock-bottom rates until unemployment falls to 7% but high inflation is one of the caveats or "knockouts" that could override the guidance.

The knockout would come into effect if inflation were expected to be 2.5% or more on an 18-month to two-year horizon.

Economists said indicators such as producer prices suggested that further down the track inflation was likely to slow.

Samuel Tombs, of Capital Economics, said: "September's UK consumer prices figures are not a significant blow to hopes that inflation is on course for a low rate."

However, Chris Williamson, chief economist at Markit, said: "There remains a significant risk that inflation could remain higher than many - including the Bank of England - are expecting over the next year.''

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